By Jon Peterson
Bethesda, Md., -based LaSalle Hotel Properties has achieved an 8.5 percent capitalization rate with its purchase of leasehold interests in two downtown San Francisco hotels.
According to Milwaukee, Wis., -based Baird Equity Research, the yield is based on the properties’ income in the last 12 months.
LaSalle acquired the 131-room Harbor Court Hotel at 165 Steuart St. and the 140-room Hotel Triton at 342 Grant Ave. The seller was an affiliate of Kimpton Group Holding.
“These returns are the difference in buying a leasehold interest in a hotel versus buying a fee-simple interest,” said Tom Callahan, chief executive, west of PKF Consulting USA in San Francisco.
The yield compares to the 3 percent rate that Thayer Lodging Group and MetLife accepted to acquire a fee-simple interest in The Ritz-Carlton, San Francisco in July, according to PKF. The 336-room hotel has 60 suites.
Michael Barnello, president of LaSalle Hotel Properties, has high expectations from the San Francisco lodging sector: “We think that the San Francisco hotel market is very strong on both a short- and long-term basis. This is one of the reasons why we have now doubled the size of our portfolio in the market with our latest investment,” he said.
LaSalle also owns the 201-room Hotel Monaco, a San Francisco boutique hotel at 501 Geary St., which it acquired in September 2010, and the 182-room Villa Florence at 225 Powell St., which it acquired in October.
LaSalle plans to invest an addition $1 million in the Hotel Triton and $2.5 million in Harbor Court, but probably won’t start work for one to three years, Barnello said. Both are considered lifestyle hotels “targeting guests who are more interested in a small intimate setting for their stay. Its customers could be in town for business or leisure reasons,” Barnello said.
LaSalle paid $48.7 million, or $176,000 a room, for the hotels. The lessor on Harbor Court is the YMCA. The lessor on Triton is a San Francisco family. The lease term remaining on both properties is 34 years.
“We had owned the leasehold interests in these properties for more than 20 years. We felt it was a good time to sell them and return the capital to investors in the partnerships that had owned them,” said Mike Depatie, chief executive officer of Kimpton. The company will continue to manage the properties going forward.
He remains bullish on San Francisco: “I think that the San Francisco hotel market is the best in the country from a supply-demand perspective. There is every expectation that this will continue for a while. Part of this is that it’s very difficult to be able to build any new hotels for cost and political reasons,” said Depatie.
The leasehold interests it sold in the two hotels were owned by two partnerships where Kimpton acted as the general partner. One of these was KHP I, a 2004 commingled fund where the manager raised $157.7 million of equity. The other was Bay Area Hotel Associates.
Kimpton would be interested in buying more hotels in San Francisco. The company is now seeking acquisitions for a commingled fund for which it gathered $203 million of third-party capital. The fund was closed in February. San Francisco is one of the targeted markets for the nationwide investment fund.
LaSalle hopes to find more hotels in San Francisco in the future. “This area remains one of our eight targeted markets around the country. The other areas we like on the West Coast are Los Angeles, San Diego and Seattle,” said Barnello. The company has invested in a hotel portfolio totaling almost 10,900 rooms in 13 markets and nine states including the District of Columbia.
CB Richard Ellis Hotels in its San Francisco office represented Kimpton. The brokers were Mark McDermott and Henry Bose, both senior vice presidents.